Small Business and Jobs: Fact or Fiction

Small business has long been hailed as the driver of job creation and that assertion has only grown stronger and louder in the wake of the recession. This assertion is perhaps the only thing President Barack Obama and Republican challenger Governor Mitt Romney agree on, echoing the small business/job creation mantra as the elections draw near. And conversations about economic growth and job creation are certainly more fraught with words like “entrepreneurship” and “microenterprise” than perhaps ever before, reinforcing the what’s widely held as truth: small business is the primary creator of jobs.

But as job growth continues at an excruciatingly slow pace, the role of small business as the primary producer of jobs leaves room for doubt, begging the question: does small business really create jobs?

What are jobs?
First consider what are counted as jobs. For example, part-time employees in addition to non-employer firms, establishments that may be using contract employers but have no one on the official payroll, don’t count those positions as jobs. Trish Truitt, the special projects manager with the National Association of Community College Entrepreneurship says that this cuts into the numbers.

“Part of the problem is the numbers aren’t counted properly,” says Truitt.

According to a recent Aspen Institute report, an estimated 56 percent of positions created by micro-enterprises – a business with five or fewer employees – were part time. Another 41 percent reported having paid employees or contractors working for their business. Not counting those two factors puts the number of jobs created by micro-enterprises at a much lower rate than it would be otherwise.

But overall, between 2007 and 2009, however the number of nonemployer firms – which can be single businesses or multiple businesses under one umbrella – shrunk though several sectors show marked growth.

And while there has been much talk about the growth of 1099ers – employees working as consultants that receive a 1099 tax form instead of a W-2, their numbers are growing at a slower pace.

“There has been much less growth in 1099s in the past three years than in the previous eight to ten years,” says James Parrott, deputy director and chief economist with the Fiscal Policy Institute, a Manhattan-based think-tank.

“This is partly a reflection of the weak state of the overall economy, and in part, some crackdown on the misclassification of payroll workers as independent contractors.

Even so the number of non-employers in sectors like healthcare, educational services, and hospitality have grown during the recession showing significant increases over that two year span. This indicates that while, yes, there is growth among non-employer firms – companies using contract and freelance employees – there hasn’t been enough to move the meter on job creation.

Matter of life and death
And while small business does create jobs, there are also a high number of deaths in young businesses – a factor that’s been exacerbated by the tenuous economic recovery.

“Yes, small businesses do create jobs,” says Parrott.

“Just not all of the jobs some observers tend to claim. There’s also a lot of churning among small businesses with a significant portion going out of business each year.”

Recent Census Bureau analysis found that the survival rate for two-year old businesses dropped by two percentage points between 2007 and 2009. Data also suggests that business survival rates, on the whole have been on a downward trend since the information was first collected in 1994.

In addition, jobs created by new companies – those under a year old – decreased from 4.1 million in the early 1990s to 2.5 million in 2010. This could mean a few things; businesses are dying off sooner, fewer small businesses are being started or more small businesses are using fewer employees. Whatever the case, this means less jobs now.

A 2011 Dun and Bradstreet report found that there was a 40 percent increase in business failure rates from 2007 to 2010. Other economic circumstances like the sputtering housing market, instability in the European economy and most certainly access to capital have also curved growth that may have otherwise been more robust.

Capital crunch
The exceptionally bad recession and ensuing recovery – the worst since the Great Depression – has also thrown a monkey wrench in the job creation process. The availability, or rather unavailability, of credit, has been a particularly big roadblock to growth. Despite interest rates being the lowest they’ve ever been, banks have kept the purse strings tight making it difficult for even established businesses with solid track records to get credit let alone startups.

“The other part of the problem is the ingredients to actually creating lots of jobs,” saysTruitt. And if job creation is a cake, then capital is the flour and this cake is missing its main ingredient.

“Having an environment that cultivates entrepreneurship without those factors it’s restricted how those small businesses create jobs … People want small biz to create jobs and they do on a limited scale but they could do a lot more if they had access to capital.”

Between 2008 and 2010 the number of businesses with less than 100 employees, have been down across the board – though establishments with one to four employees seems to have suffered the least, losing the fewest employees between the start and end of the recession.

According to the U.S. Census Bureau, in 2010, e-commerce growth outpaced regular economic growth with e-commerce shipments, sales and revenues increasing by 16.5 percent compared to 6.7 percent for the overall economy. No storefront often means no employees necessary.

“If I’m selling tube socks online, instead of in a traditional store, it’s just me. I don’t need the kids to help me stack the boxes in the back and I don’t need someone to watch the cash register when I go out to lunch or to the bathroom or whatever,” says George Acevedo, a business counselor at the Bronx Women’s Resource Center.

“It creates jobs indirectly in that those people manufacturing those goods that I now sell online have another outlet to sell more but ultimately, I don’t know that it makes that many more jobs.”

Fact or fiction
Despite popular belief, small business isn’t producing high numbers of jobs though this isn’t because fundamentally small business doesn’t. Despite providing small businesses with incentives like tax breaks funnelling money into entrepreneurial training programs, the job creation potential of small business is being cut down by other factors.

Shaky confidence in the market, anticipation of fallout from Obamacare, and, of course, access to capital all curb small business growth.

“Overall, we’re doing a poor job in the country as an economic system that is supporting the very thing that gives rise to entrepreneurs, that give rise to job creation, we’re actually suffocating it in many ways,” says Truitt.

While some say that the country will have to sit tight as the economy makes a slow, but steady, ascent out of the jobs hole, other say extreme times may call for extreme measures.

“A broad based recovery will require more stimulus at the national level,” says Parrott.

“Nothing much will change until there is more stimulus from the national level, helped out by better fiscal policies at the state and local levels. Austerity is antithetical to small business prosperity.”

But as the economy becomes more globalized, more often, people are able to offer their skills and services directly to potential buyers without the middleman making how well you can sell yourself to a company much less relevant than how well you can sell yourself directly to customers around the globe. Perhaps knowledge, skills and individual grit is the new driver of jobs.